Defense stocks: No longer a sure thing

For most of the Bush era, defense stocks seemed pretty close to a sure thing. Those days are over and are not coming back any time soon, according to one defense analyst.

The Obama administration is paring back spending on complicated weapons systems such as the Lockheed Martin Co. (LMT) F-22 and Joint Strike Fighter programs, which helped push shares of the number one defense contractor up by nearly 80 percent over the past five years. Shares of the Bethesda, Maryland-based company fell this year as Wall Street soured on the sector. Lockheed is hardly alone.

"It's possible that 2010 could be the high-water mark as far as defense spending," Jim Albaugh, president of Boeing's Integrated Defense Systems, recently told Bloomberg News.

Cuts to navy shipbuilding programs proposed by the Obama administration may hurt the bottom lines of Northrop Grumman Co. (NOC) and General Dynamics Corp. (GD). For years, critics have complained that there is not enough work available to keep the shipyards of both companies running. Northrop has rebounded some lately amid positive commentary from pundits that its 33 percent sell-off over the past year is overdone. General Dynamics, with shares off nominally this year, has been helped by its Gulfstream business jet business.

Shares of Raytheon Co. (RTN), a specialist in defense electronics such as radar, along with missiles, are off 13 percent this year. Rival L-3 Communications Holdings Inc. (LLL) has seen its stock down more than 30 percent this year, barely moving since January.

In an interview, Rick Whittington, an analyst with JSA Research Inc., told DailyFinance that he sees no reason to be optimistic about the sector.

"There is going to be a a lot of pressure on defense for the next half dozen years," he said.

President Obama is, among other things, accelerating the U.S. pullout from Iraq and increasing the troop presence in Afghanistan, which will need fewer expensive weapons systems, Whittington said.

Investors interested in the aerospace business should consider Boeing Co. (BA) and its suppliers, such as Rockwell Collins Inc. (COL). Boeing, the second-largest defense contractor, has seen its shares pounded by more than 46 percent because of worries about delays to the 787 Dreamliner.

"It looks like they worked the bugs out of it," Whittington said. "They seem to be on schedule for first quarter 2010 delivery."

But Whittington argues that defense spending goes in cycles. "They have had eight great up years and that's ending. We're going to have a significant downturn," he said.

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